Do Oil Shocks Drive Business Cycles? Some U.S. and International Evidence

[ViC78]

Looks like the Fed has caught up with EJ 's analysis on peak cheap oil and it's use as a leading indicator of the direction of the economy.

"Do Oil Shocks Drive Business Cycles? Some U.S. and International Evidence"
by Kristie M. Engemann, Kevin L. Kliesen, and Michael T. Owyang
Hamilton (2005) noted that nine of the last ten recessions in the United States were preceded by a substantial increase in the price of oil. In this paper, we consider whether oil price shocks significantly increase the probability of recessions in a number of countries. Because business cycle turning points generally are not available for other countries, we estimate the turning points together with oil’s effect in a Markov-switching model with time-varying transition probabilities. We find that, for most countries, oil shocks do affect the likelihood of entering a recession. In particular, an average sized shock to oil prices increases the probability of recession in the U.S. by about 60 percentage points over the following year.
Full Text - Acrobat PDF (346k)

[GRG55]

Re: Do Oil Shocks Drive Business Cycles? Some U.S. and International Evidence

Looks like the Fed has caught up with EJ 's analysis on peak cheap oil and it's use as a leading indicator of the direction of the economy.

"Do Oil Shocks Drive Business Cycles? Some U.S. and International Evidence"
by Kristie M. Engemann, Kevin L. Kliesen, and Michael T. Owyang
Hamilton (2005) noted that nine of the last ten recessions in the United States were preceded by a substantial increase in the price of oil. In this paper, we consider whether oil price shocks significantly increase the probability of recessions in a number of countries. Because business cycle turning points generally are not available for other countries, we estimate the turning points together with oil’s effect in a Markov-switching model with time-varying transition probabilities. We find that, for most countries, oil shocks do affect the likelihood of entering a recession. In particular, an average sized shock to oil prices increases the probability of recession in the U.S. by about 60 percentage points over the following year.
Full Text - Acrobat PDF (346k)

Former CIBC Chief Economist Jeff Rubin has been another proponent of this view...

Wednesday, March 3, 2010 6:08 AM
We’re all PIGS now

Jeff Rubin

Wall Street is worrying about financing the PIGS (Portugal, Italy, Greece and Spain), and little wonder. Proposals to halt exploding public sector budget deficits in those countries already have the workers out in the streets in Athens and Madrid.

But we needn’t look across the Atlantic to see a debt crisis in the making. The U.S. economy is sporting a record one-and-a-half trillion dollar budget deficit, and even Canada, after running a decade of budget surpluses, is posting its own largest deficit ever.

The fact of the matter is, wherever you go in the OECD, we’re all PIGS now. That’s because we mistook an energy shock for a financial crisis and bailed out everyone under the sun. But we are soon going to find out that today’s bailouts are tomorrow’s spending cuts.

The enormity of the government cutbacks that lie ahead is yet to be appreciated.

Simply winding down the stimulus is going to be a challenge in itself to the economic outlook, considering that virtually every major OECD economy is still on fiscal life-support right now.

But actually paring those deficits down is a whole other matter. For the economy, it is tantamount to taking one’s foot off a floored accelerator, suddenly slamming on the brakes, and then keeping them on at full force for years to come.

That day of reckoning is coming sooner than you might think...